Figure 15-3. Private production of a new idea under legally enforceable IPRs

Because the legally enforceable IPRs endow a firm with monopoly rights over the new idea produced, the monopolist will price off of the MR curve with the result that, when it optimizes profits where MR = MC, q* will be produced and sold at Pm. Since area OPmaq* is greater than area Obcl, the firm can earn a return on the initial sunk cost investment, and the new idea will be privately produced. Thus, under an IPR regime that provides a reasonable assurance of monopoly rents, individual firms are willing to undertake the initial investment required for the production of some new ideas.

Even under strongly enforceable IPR regimes, however, some disembodied items will not be privately produced. This will occur when the sunk cost investment is so large that it cannot be recovered even with monopoly rents. This is depicted in Fig. 15-3 where the sunk cost is Oghl and its area is larger than area OPmaq*. Disembodied items will not be privately produced, even if the monopolist is able to perfectly price discriminate, if area Oghl is larger than area Ofaq*. This lack of private production does not mean, however, that society would not gain from the production of the new idea. The idea will make society better off as long as area Oghl is less than or equal to area Pcfe.

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